A Profile of Young People in Debt

Each generation believes it faces greater challenges than those that came before. In a way, each generation is correct. The challenges keep changing, forcing young people to cope with problems there parents didn’t face. Our grandparents may have struggled with poverty during the Great Depression, but many modern young adults face a slightly different crisis: a crisis of debt.

Mindy Fetterman and Barbara Hansen of USA Today have written a piece exploring the debt problems facing young adults. This article is the first in a six-part series exploring these issues. Despite some alarmist reporting, there’s interesting stuff here. For example, the authors report that:

Nearly two-thirds of twentysomethings carry debt. Those who do have debt have taken on more in the past five years.

Nearly half of twentysomethings have stopped paying on a debt. (This stat shocks me — when did this become acceptable?)

The article discusses the misperceptions that older generations have regarding young people’s debts. The authors believe that while some young adults do get into debt through poor choices, a majority of the problem comes from larger economic effects such as:

Soaring tuition

Reduced student grants

Increased student-loan debt

Flat wages, especially for young men

Rising home prices

As a result, more young people are relying on their families for support, both for housing and for money. Young people are also saving less than before, which alarms me. The article quotes several people who essentially complain, “I cannot afford to save.” I used to believe this, too, but I was wrong. I’m still paying the price for being wrong. Most people can afford to save something, even if it’s just $50 a month. Remember: compound returns favor the young.

The article provides a link to a very rudimentary budgeting spreadsheet. (I’d like to think you can find better options in this list of handy personal finance spreadsheets I shared in May.) It also points to some useful resources:

To be fair, “rising home prices” only has a dramatic affect on those who insist on buying into today’s insane housing market. Rents have been increasing much, much slower.

By not buying a home after getting married at the age of 22, my wife and I have been able to:

- pay off $40,000+ in (mostly college) debt
- contribute steadily to a 401(k)
- save some cash
- invest some money in other accounts
- buy two vehicles (with cash)
- pay for a year of education for my wife at the Art Institute (with cash)

…all on a slightly above-median income.

Had we purchased a home, we would have been rolling in “equity,” but at the expense of having tens of thousands of dollars debt hanging over our heads, and not being able to buy nearly as many nice things as we have been able to.

However, as you say, it’s easier to complain than to make the hard choices and do what’s best with your money.

I just noticed this post after I did a writeup on the same USA Today piece. I focused more on the second half of the article when it discusses the disparity between the younger generations and their parents though.

Looks like it will be an interesting series, I look forward to what the next segment has to say.

Imagine what you’d been able to save by not buying ‘as many nice things’.

I would gladly sacrifice being able to buy as many nice things as the Jones’s to get a head start on home buying. Though, in our case it’s different because we live in one of the few areas in the country where home prices are still increasing (Richmond, VA). It just shows that each situation is individual, however, those individual situations paint a story that is important- as demonstrated by the USA Today article.

I’m not sure why you seemed to latch on to that particular minor point in my comment, but I feel obligated to clarify. The “nice things” don’t really approach the kinds of “stuff” that many of my coworkers have accumulated. I’m talking about a few video games here and there, some DVDs, one sub-$1,000 PC… that sort of thing. Heck, even the newest car we’ve purchased has been five years old.

If we had been dead-set on getting a house four years ago, we could have. However, we would have had unacceptable (to me) levels of debt in addition to the mortgage, and been in a much worse-off financial situation today.

Each situation is indeed individual, of course. I was just pointing out that whether the bullet point of “Rising home prices” affects you or not is a personal choice, not an inescapable reality.

This is key. As always, do what works for you. Do what helps you reach your goals. If owning a home isn’t a priority, then by all means use the money to meet your other goals. But if owning a home is a priority, then sacrifice in other areas.

I guess what I rail against is the idea amongst some of my peers that having anything less than their standard of living is unacceptable. Sorry that I jumped on your nice things comment.

What I’ve found is that our standard of living takes an immediate dive post-college. How you deal with that goes a way toward determining your financial future. You can either spend your way out of it by continuing to live the way you have with the same habits that now cost so much more– going out to eat all the time, drinking every weekend, going to bars, concerts, etc. Or, you can embrace it and sacrifice the ‘nice things’ for a few years and end up way ahead. Too many of my cohorts don’t change their lifestyle and end up regretting it when they’re 30.

But the thing about buying a house is, even though you are taking on $200K in debt, you still have an asset that is worth about $200K. Maybe it will go down in value a bit or maybe it will go up, but its still an asset, and unless something is drastically wrong it will probably stay more or less around what you paid for it or go up in value. Even if it goes down in value, you can still live in it, and historically real estate always tends to go up.

You don’t get that with an apartment.

Another thing is you will only have to pay your mortgage for 30 years (heh, only ) or less (if you’re smart). Rent is forever. The key is that *when you retire* is when that 30 year investment really begins to pay off. After buying a house, that fixed monthly expense of your mortgage basically becomes (in theory) tax and insurance. Retire after renting for 30 years and you just have to pay more rent.

Not to mention the opportunity to trade down and capitalize a small bundle in cash.

And then there’s the tax deductions, potential to rent rooms out, ability to stay in one place for 30 years if you want.

To me, the benefits of buying a house outweigh the risk of carrying more debt and the risk of depreciation. Even if the market is a bit insane right now as someone said.

Granted, I think buying a house fresh out of college at 22 is just looney, unless you don’t have debt at that point, and really do have the money to be smart about it.

I can understand how a college student can get into deep debt. I am in college right now and I see it everyday.. My peers have all of their credit cards maxed. We all put our bets on the future hoping that our nice salary when we get out of college will cover these expenses. It’s just plain difficult to work during college if you want to keep your social life. Not to mention that the college life does not coincide with the work life. I know one of my peers whos main income source is… get ready for it– playing poker. At any given time he is either up a bunch or deep in debt. It’s just difficult to do school work, have a social life, and make $6.75 an hour flipping burgers. It makes credit cards seem like the only easy way out.

I was one of those college students with too many credit cards for my pitiful income. I knew things were bad when I was buying groceries at the Texaco, because only my gas card still had room on it for new charges. I knew things were good when I could open a new card account and use it to pay off other cards with room to spare!

That was years ago now, and I’ve learned a few things. But some of what I’ve learned is that the credit card companies play some games with us that need to stop. Now I’m at Consumers Union, publisher of Consumer Reports (where some really smart financial wizards work) and we’re getting the word out–using a funny song about credit card debt by the Austin Lounge Lizards– about something we can do to stop card company tricks that can trap people into higher interest or greater debt than they can afford.

[...] I read John Chow’s post on his blog which lead me to write this post. I have been with the AdSense program for over 2 years and I’m loving it along with all the other products offered by Google. With all of my stupid past financial mistakes it was hard for me to pay my minimum payments; however, because of Google I slowly paid off alot of my debts. I know I’m not the only one with debt mistakes, look here. AdSense also allowed me to travel; the AdSense revenue payed for alot of my traveling expenses. [...]

No problem. We’re all on the same “team” here, rooting for responsible personal finances. I totally agree with your sentiments, I’ve seen the same things.

J.D. & icup,

I should make it clear that I’m in no way against buying a house, and I hope to be able to buy one myself some day. Under most normal circumstances, buying a home is definitely a smart financial move. I just don’t think that we’re living in a normal time (in many parts of the country that is–mine included).

I graduated in 2003 and calculated my debt soon after. I owed a little over $50,000.

I have done much better since then in reducing that debt, but of course it is not an easy task.

I think the problems with the debt of youth today are: the lack of financial education, increasing student loans and education costs, and the effect of consumerism. Most young people just don’t understand money. They understand that when they have it they can buy things… and there are so many things to buy that are waved in front of their faces on a constant basis, that the little money (or credit) young people do have is put in the wrong places.

I am very happy to have to found this post today as I recently have been writing about this same topic as I am trying to chronicle my way out of debt as a result of these mentioned problems.

Shameless plug, but I am also hoping that I can educate people in mistakes I have made in the past and how to learn from this: http://www.gettingdebtdone.com/

I’ve only started reading your blog a bit here and there. Lots of great advice/thoughts in this.

Right now I’m reading “The Wal-Mart Effect” by Charles Fishman. I’m not sure how I feel about the book yet (I’m a little disturbed by the lack of footnotes) but one of the interesting parts of it, which has been repeated lots of places, is how much Wal-Mart puts the squeeze on their suppliers. In fact, one could argue that it is the practices of this giant retailer which has pushed some suppliers to take their manufacturing overseas. They must cut costs.

My parents and my in-laws are terrific consumers: wasteful and always looking for the bottom line dollar. It got me thinking today, how much is the next generation getting squeezed by the generation before? Is there any way to not go into debt? If millions of jobs go overseas and we are in some price war race to the bottom, is it suprising that there is a lack of opportunity across the board? Anyway, food for thought today.

I graduated a little over a year ago (I’m 23 now) and I was determined not to fall into the same debt trap as most of my friends. I earn a very high income for my age group and I make the most of that by maintaining at least a 40% savings and investment rate. My goal is to get this up to eventually get this up to 60%. I think I enjoy a high standard of living, as in I am happy with the things that I own, but that is because I never buy anything on impulse. I consider purchases,both big and small, at least five times before I take the plunge and when I do I derive a very high sense of satisfaction from everything I own.

Those people who are in debt have only themselves to blame. They just spend and spend; they’re upsessed with spending more. In China, where the median wages are 40 times less!, they still manage to save 25%. If people in the US would learn to live more frugally they could save more then 80% of their income. I’ve done this. I live in an extremely expensive part of the US with a median salary (for the area I’m in) and I can still save more then 80% of my after tax income.

If The Millenials are in such tremendous debt, then they learned the more destructive behavior from their Baby Boomer parents. Perhaps the Baby Boomers were more frugal, but I know a Baby Boomer who is a parent of a Millenial and Generation Xer and she bails them both out of their debts all the time. Also this mother goes on spending sprees for herself and others at discount stores or any store having a clearance sale. Financial irresponsibility is learned behavior. Also I agree that there should be classes taught in high school, maybe earlier, teaching the importance of saving, budgeting, investing, FICO scores, debt management, interest rates and the like. In terms of anyone who believes that not paying debt is unacceptable, there are young people living off of Ramen Noodles, driving with five dollars worth of gasoline in their used cars and paying $650 a month in day care expenses for a pre-schooler. Not to mention having to contend with shut off notices from utility companies and harassing calls from collection agencies. I know several people who are college grads and they work at eat-in restaurants and retail stores making $8-$10 an hour. A few have entry-level positions making less than $30,000 a year. Two of thm are $120,00 in debt. Another is $250,000 in debt. I read a newspaper article about a grad who hung herself with her credit card statements spread out on her bed. These grads don’t make a living wage and they jobs aren’t there for them like they were for previous generations.
Also I do know someone who is working while in college, but she’s required by the university to do an internship and they won’t count her job as an internship. She’s getting chest pains and tension headaches from working full-time, doing an internship and taking three grad school level classes, all because of the college’s weird policy about your job can’t be your internship even if it’s in the field your studying. There are no one-size fits all answers. But I know one thing, 80% of Americans are living paycheck-to-paycheck while 2% of the country keeps all the wealth, regadless of age. What does that say about our country? The problem doesn’t all lay with young people, public policy needs to change too.

i am 21 years old and currently attending college. i was reading this article gathering information for a paper i’m writing on debt among young people and how it is a bit ridiculous the amount of debt that my generation has accumulated. i know many many students and friends that are not even halfway done with college but are up to their ears in debt. i don’t think they realize how much their decisions now are going to affect them in the future. many of them feel they need things that they could, in my opinion, do without. others don’t want to work so they borrow money or rack up revolving debt to live and pay bill. i work part-time during school and full-time constuction during the summer and i may not have the nicest things and the most glamourous life but my goal is to not have any unnecessary debt when i get out of college. i feel like the problem, as someone mentioned earlier, is lack of education but also a lack of responsibility and maybe being too sheltered or taken care of by parents. unfortunately my friends will get to learn the hard way what living off nickels and dimes is all about.

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